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Are Credit Markets Wrong This Time?.

Once again credit refuses to follow along with the strategy of hope that equities are using. They refuse to accept proposed and rumored bailouts of Europe. They refuse to accept economic weakness as simply transitory. In fact credit markets are hitting multi decade if not all time lows.

Credit markets have a proven track record of forecasting economic weakness. In some sense it may simply be a self fulfilling prophecy. On the other hand as stated countless times equities have failed miserably over the past recession and history will proven even worse over the current.

Below are updated charts of various credit products in no set order.

5 Year Interest Rate Swaps: No one seems to be concerned about rising rates as the demand for swaps continues to move lower. Nor does there seem to be any credit formation but that would be overstating the obvious.

Eurodollar Deposits: Non US based dollar denominated deposits rates are rising as the demand for USD within EU banks is growing. The recent emergency swap lines were further proof of the ongoing USD funding problems within the EU.

Corporate Bond Spreads: As spreads continue to widen the most recent move in the SPX was not supported by corporate spreads. In other words credit continues to fade equity.

Corporate Bond Yields: Aaa and Baa debt yields are at historic lows. These two charts show just how far apart equity and credit remain on their views of future economic growth.

Someone is wrong and in a really big way. Personally I am siding with credit based on their track record.

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